Things You Should Know About IRS Phone Number
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Operating business from home? Mind IRS requirements
If you operate your business from home, there is absolutely no objection from IRS. However while scrutinizing your tax return, IRS is a bit suspicious. You need to have ready satisfying answers to the usual queries IRS raises on such businesses.
When you operate your business from home, there are some specific tests which you must pass. Failing in these tests carries the risk of non-allowance of your business expenses.
A home office, according to IRS, must be the one which is regularly and exclusively used for business. These are easy requirements. There is no definition of regular use. So it may not be a fulltime use. If you operate part-time from home, it is still considered to be regular use. The better policy is to put some minimum number of hours on per week basis.
The requirement of exclusiveness is slightly difficult. When you designate an area as home office, it must be used only for work. You should not do anything else there. Of course there are some specific exemptions for this requirement – if you are doing daycare business, or storage related business, sharing of that area is allowed. In short, you cannot put bed or TV in your designated work area. If your workspace is part of a big area, the situation becomes complicated. If you have things like a kitchen table in that area, it is better to put a partition. Similarly, if you have only one computer in your house and your children are using that computer for their homework along with your business use, it is not supposed to be an exclusive office. You should better prepare appropriate and documentation supporting your claim.
Try to keep some records supporting your claim of a home office. Here are some suggestions
- It’s better to take photographs of the workspace and keep them along with the tax records.
- Preparing a diagram of home office proportionate to the home is very useful in determining the percentage of expenses.
- So keep a record of all the visits which are relating to your business.
- Prepare stationery like business cards or promotional material quoting your home address.
- It is advisable to maintain a separate phone connection for business purposes.
You can claim part of the expenses on your home towards your business. However, for claiming such a deduction in your business you need to know the exact area in square feet allocated to your office and the proportion of such area to the total area of your home. So if you have a five-room house and you are using one room for your business, you can claim 20 per cent of the expenses like mortgage or rent, insurance, repair and maintenance expenses etc.
Claiming personal expenses like social security and insurance
You can deduct premiums paid on your Health Insurance towards your business expenses. The social security and Medicare tax can also be deducted. The contributions made to retirement plans are also fully deductible. All these expenses are considered personal expenses, but operating a home based business gives an advantage of deducting them on your tax return.
The element of profit motive
Well claiming of expenses is one part. The most important part is to show profit motive. The deductions of expenses cannot exceed the profits made by the company. Also, there is a risk of classification of your business as a hobby unless you make consistent efforts to generate profits. Actual profit is not required, but evidence showing attempts to get profit is important. Such evidence can be in the form of advertising expenses or a detailed diary keeping record of work done for the business. If this is not maintained, IRS may treat your activity as your hobby and the entire list of expenditure will be disallowed.
The Tax Lawyer—Robert Wood “IRS Bill Dispute”